Q: Our client has $300,000 in a 403(b). The pre-1987 account balance that has been tracked by the custodian is $30,000. Client turned 70 1/2 in January 2013. Client wants to roll over 403(b) to an IRA.

If client rolls over $270,000 to her IRA, is the determination of what is left of her pre-1987 amount calculated last-in, first-out ($30,000 left as pre-1987), first-in, first-out ($0 left as pre-1987), or is it prorated ($3,000 left as pre-1987)?

A: The amount of the pre-1987 balance remaining is zero.

Of the $270,000 that she wants to roll to her IRA, will she have to take a minimum distribution first before rolling it?

A: Yes.

If the RMD is $15,000 and she rolls $255,000 to an IRA, leaving $30,000 in the 403(b), would it be the grandfathered balance that would be left in the 403(b)?

A: No. Here's how this works: A minimum distribution is required for 2013. The amount of the required minimum cannot be rolled over. The 2013 minimum is based on $270,000 ($300,000-$30,000).

The amount distributed that exceeds the 2013 required minimum is first deemed to come from the pre-1987 balance. If the 2013 minimum is (for example) $15,000, and the plan distributes $45,000 in 2013, the entire pre-1987 balance of $30,000 is distributed.If the RMD is $15,000 and she rolls $255,000 to an IRA, the $30,000 remaining in the 403(b) is not the grandfathered amount; the grandfathered amount is distributed as part of the $225,000. §1.403(b)-6(e)(6)(iii) provides that "any amount distributed in a calendar year from a contract in excess of the required minimum distribution ... is treated as paid from the pre-’87 account balance ..."

She is due $300 for 2012 (Oct-Dec). In March, we will cut a check for $600 and begin regular payments of $100 on 4/1/13. Is that correct, or is the very first $100 actually on 4/1?

A: The very first $100 is distributed on 4/1/13, and thereafter $100 must be distributed each month, until her entire benefit has been distributed. §1.401(a)(9)-6, A-1(c)(1) provides that "The first payment, which must be made on or before the employee's required beginning date, must be the payment which is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year.”

Q: Safe Harbor 401(k) with profit sharing had an eligible employee who switched to union mid-year. The plan excludes union and the profit sharing has a last day requirement.

Does he get the safe harbor for the compensation during the year before he switched to the union?

A: Yes.

Does he not receive PS because he was not eligible at the end of the year?

A: He receives the PS contribution based on compensation paid before he becomes a union employee. He is employed on the last day of the plan year.

Is he counted for coverage for the year?

A: Yes.

The profit sharing also has a 1,000 hours requirement. He didn't work 1,000 hours before switching to the union but he did have 1,000 for the full year. Does he still get the PS?

A: Absent a specific plan document provision to the contrary, no. §1.410(b)-6(d)(2)(i) provides that "An employee who performs hours of service during the plan year as both a collectively bargained employee and a noncollectively bargained employee is treated as a collectively bargained employee with respect to the hours of service performed as a collectively bargained employee and a noncollectively bargained employee with respect to the hours of service performed as a noncollectively bargained employee."

Q: A plan’s eligibility requirements are 1,000 hours and 12 months of service.

An employee does not complete the 1,000 hours in the 12-month period beginning on his hire date.

The eligibility computation period shifts to Plan year (calendar).

In the Plan year, the employee completes a 1,000 hours but does not complete 12 months starting from the 1st day of Plan year to end of Plan year (1/1 to 12/31).

Does the individual have to complete the 12 months during the Eligibility Computation period of 1/1 to 12/31?

A: No. The employee must complete 1,000 hours within the 12-month eligibility computation period. The 12-month period is a measurement period; the plan cannot require employment in each of the 12 months, or on the last day of the 12-month period. If the individual is not employed on the entry date next following the completion of the eligibility computation period, and is subsequently rehired without incurring a break in service, the employee becomes a participant upon the rehire date. See §2530.200b-1(b) and §1.410(a)-4(b)(1).

Q: We proposed a cross-tested Defined Benefit/401(k) plan for a medical group. The contributions were good for the doctor with reasonable employee costs.

Another TPA did a competing proposal bringing the owner's 12-year-old twin kids into the mix, giving them each a $5,000 salary with a $50 benefit in the pension plan, thus allowing him to pass 401(a)(26) just by covering the owner, spouse and two kids. The employee cost dropped by about $10k. Our firm has never allowed children this young in our plans, especially when it is obviously designed to alter the non-discrimination testing. What are your thoughts on this?

A: Let's see. First, it would have to be legal in the particular state for 12 year olds to be employed by a parent's business. The children would have to actually perform services for (in this case) the medical group, as employees. And the amount of compensation paid to the children would have to be reasonable for the services performed. If those requirements are satisfied, they can include the children in the plan. Otherwise, they cannot.

Q: We have a client who has her own one-person medical corp. and a defined benefit pension plan covering only her. In 2012, she joined a physician group that has employees, and we understand the transition rule for satisfying coverage under 410(b) applies through 12-31-13. Her DB plan was terminated on 12/31/2012.

The doctor wants to have a profit-sharing plan for 2013, where she will roll over her DB plan assets, so she can control her investments and have better bankruptcy protection than with an IRA, and we are in the process of setting that up.

If we freeze the profit sharing plan as of 12/31/13, does that avoid future failure issues under 410(b)? Are there any other issues we should be aware of for freezing the profit sharing plan after one year of operation?

A: Yes. The plan will not be in compliance with section 401(a). Specifically, the requirement that contributions to a profit sharing plan be "recurring and substantial."

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